Tax cuts to boost US economy, but benefits to be short-lived

January 24, 2018

The US economy is likely to grow in 2018 at its fastest pace in three years, fueled by the biggest tax overhaul since the 1980s, a majority of economists said in a Reuters poll that also showed they expected the boost to be short-lived.

While the $1.5 trillion tax package signed into law by President Donald Trump on Dec. 22 did not lead to a major market reaction, it gave a solid lift to the outlook for the world’s largest economy.

At the same time, poll respondents did not expect the Federal Reserve to deviate from its current guidance of three interest rate increases this year.

The poll of more than 100 economists during Jan. 11-19 showed US annual gross domestic product expanding 2.6 percent this year, compared with 2.4 percent predicted last month. If achieved, the increase would be the biggest since 2.9 percent in 2015.

More than three-quarters of 76 economists who answered an extra question said the predicted benefits from the tax cut plan would start to boost growth significantly this year. But most said that might prove to be short-lived.

“We will likely see a sugar-rush from the tax cuts in early 2018 that fades and offers limited longer-term impact,” said Janney Montgomery Scott Chief Fixed Income Strategist Guy LeBas.

However, optimism that the tax cuts should feed through to consumer confidence pushed more than half of the regular respondents to raise their 2018 growth forecasts from the December poll.

“This upgrade (to growth forecasts) shows up primarily as a lift to consumer spending and business investment, as lower average tax rates for businesses and households enable them to spend more,” TD Bank Group Chief Economist Beata Caranci wrote in a note to clients.

But economists expect growth to slow to 2.2 percent next year, suggesting the impact of the tax cuts will not last long, in line with the views of the Fed’s policy committee members.

As a result, respondents in the poll expect the economy to reach the Trump administration’s target of an annualized 3 percent growth rate no earlier than mid-2019, the end of the forecast horizon.

Still, companies are expected to increase US payrolls and push unemployment even lower. Economists forecast the jobless rate to average 3.9 percent in 2018 and 3.8 percent next year, down from the current 17-year low of 4.1 percent.

As in past years, increased employment is not expected to mean higher pay, so economists forecast the central bank’s preferred inflation measure would stay below the 2 percent target for much of this year.

The poll showed the core PCE price index would only reach the target in the fourth quarter and level out to average that 2 percent level next year.

Those forecasts were an upgrade from the previous poll, but the latest Fed minutes, from the Dec. 12-13 meeting, showed concerns over the current inflation path. - Reuters

Related News

About Malaya

Malaya Business Insight's weekday sections treat readers to timely articles on shipping, banking, information and technology, automotive and motoring, real estate and property development, travel and tourism and people and sectoral events. Special issues and supplements are designed to enrich current information and data files of readers with pre-selected topics of national and local significance.